The aggressive approach of Indian tax authorities on transfer pricing and international tax matters underlines the government’s intention of taking strong action to defend its tax base. When it comes to taxation of cross-border transactions, India’s inclination to widen the source-based tax rules is clearly demonstrated by the retrospective amendments, introduced in 2012, relating to indirect transfers which widened the scope of royalties.
The 2012 retrospective amendments in tax law for software, equipment leasing and telecom transactions were never intended to override the relevant treaty provisions, wherever the treaty provisions are beneficial. However, it appears that these amendments were a shot in the arm for the taxman in denying treaty benefits despite the judiciary’s view to the contrary. in several cases. Transactions hitherto considered as pure ‘service’ arrangements from a tax perspective, like cross-border telecom services, are dragged into tax net under royalties—following the amendments—ignoring the beneficial treaty provisions. The challenge escalates when the Indian payers are held to be in default of not withholding taxes and expenses are not allowed. Even a conservative approach to withhold taxes irrespective of the treaty provisions may not resolve the issue since such taxes may not be creditable in the home country leading to significant leakages. This leads to significant uncertainty on tax positions, resulting in litigation.
Another area of concern for foreign investors is the lack of an effective dispute resolution policy and mechanism resulting in several cases getting held up at the courts for years. While the government introduced the fast-track Dispute Resolution Panel, the forum has not proved effective in international tax and transfer-pricing disputes and acts as a gateway to the tribunals.
To address industry concerns over increasing tax disputes and uncertainty, the government had introduced various reforms. However, whether these reforms have been successful in restoring investor confidence with much-needed clarity and certainty on various issues is debatable. The business community is looking forward to the advance pricing agreement (APA) regime introduced by the government in 2012 as an effective dispute resolution mechanism. The fact that around 150 APA applications have been filed pan-India in the first year of introduction is a testimony to its popularity amongst MNCs. Having said that, it would be interesting to see the manner in which such applications are eventually disposed-off. The government also notified Safe Harbour rules in September 2013—outlining circumstances where the transfer price of taxpayer would be accepted by tax authorities. The rules,